CAIRN Energy has struck oil in the Manner Basin off the coast of Sri Lanka.

A subsidiary of the company's Indian operation - Cairn Lanka - found oil in the first of three planned test wells.

Cairn said further tests are needed to determine "the commerciality of the discovery".

The well, drilled to almost a mile below the surface, is the first drilled offshore Sri Lanka in 30-years.

Chief executive Simon Thomson, said: "Cairn is delighted with this frontier exploration discovery, the first well in Cairn India's three well drilling programme in Sri Lanka."

The Sri Lanka find failed to lift Cairn's share price, which fell nearly four per cent in early trading.

Cairn has lost around 40 per cent of its market value in the last six months.

Last week Cairn reported its sixth dry well in its Arctic drilling programme offshore Greenland, and the third of this year's s400 million summer drilling programme.

The company said it planned to drill another two wells in the Arctic region before the summer season ends, and said in August it may bring in a partner for future exploration in the region.

Cairn is in the process of selling 30 per cent of its 52 per cent stake in Cairn India to Vedanta Resources.

The sale of 10 per cent of its fully diluted share capital in Cairn Indian, worth $1.4 billion, went to Vedanta Resources in July.

A sale of the remaining 30 per cent on offer, valued at $4.1 billion, was given Indian government approval in June.

The sale had been held up by a dispute with the Indian Government over royalties from oil extracted from the Rajasthan fields.

Cairn's Indian subsidiary paid no royalties on its 70 per cent stake in the fields, and argued the original contract gifted state-owned Oil and Natural Gas Corporation (ONGC) a 30 per cent stake in the 6.5 billion barrel field.

Cairn India argued tax and royalties should be the liability of ONGC, though Cairn urged shareholders in the Indian subsidiary to accept the deal, approved on September 14.

A final resolution for the sale, now awaiting security clearance from the Indian Home Ministry, is expected later this month.